Hedge funds
Hedge funds have a particularly unique set of challenges, both from the perspective of the fund managers themselves and the banks dealing with them.
Hedge funds are often small scale operations, at least compared with traditional fund managers or banks, yet enter into large positions in complex financial products. They require solutions that can deal with complexity yet are appropriate to their scale. Hedge funds are never far from the headlines, and institutional investors and regulators are increasingly keen to ensure that fund managers adopt high levels of risk governance.
On the sell side, banks need to ensure they have in place appropriate risk controls for dealing with this highly lucrative yet challenging client base. This ranges from having the right due diligence, documentation and risk policies, to the methodologies and systems used to calculate and call for margin.
We have worked with both buy and sell side institutions to help them improve their risk environment and help them build their businesses.
Publications
Client
Hedge fund manager
Location
UK
Client need
The client had recently expanded its trading volumes and had started to enter into more complex products. The client wanted to upgrade its risk management practices to take account of the additional risks being undertaken and to ensure compliance with best practice.
Our deliverables
We reviewed the fund manager’s risk practices and identified areas of weakness. We advised the fund manager on the appropriate risk governance and policies that should be put in place. We then worked with the fund manager to develop a suite of reports and stress tests to be delivered from its recently implemented portfolio and risk management system.
Client
Major hedge fund manager
Region
UK
Client need
The client needed to develop a methodology for the measurement of credit exposure for certain products (credit and equity related) which could not be handled by its current risk management system. This was required both for limit control purposes and for the measurement of economic capital.
Our deliverables
We developed a methodology for the measurement of potential future exposure and documented this in a methodology paper. We developed a model for the calculation of exposure which the client now uses on an ongoing basis in its business.
Client type
Investment bank and prime broker
Location
UK, US and Germany
Client need
The client had an active business with hedge funds in derivatives, securities financing and prime brokerage. It wanted to satisfy itself that its margin terms were in line with market practice. It was also planning to offer margining on a more sophisticated basis (for example VaR based margining) and wanted to know the practices adopted by its peers in this area and the changes it would need to make to implement a more sophisticated margining approach.
Our deliverables
We conducted a market intelligence survey to ascertain practices within competitor firms. We also surveyed the client’s hedge fund clients to ascertain their views on its margining levels and other aspects of its risk policy and service level.
We benchmarked the client’s current approach against its peers and recommended changes to its policies and methodologies to bring it into line with market practice. We also set out a roadmap for the implementation of more sophisticated margining methodologies.
Client
Prime broker
Location
US
Client need
The client wished to provide its hedge fund client base with an online tool to enable them to conduct a self-assessment of their control environment.
Our deliverables
We designed an online survey which asked questions about various aspects of a fund manager’s risk and control environment. At the end of the survey the fund manager was presented with a score for the quality of its control environment and areas of potential weakness were highlighted.
Client
Pension fund manager
Region
Benelux
Client need
The client had decided to upgrade its risk management capabilities and was in the process of building a risk management department. The client had produced a draft risk management policy but wished to have this reviewed to ensure compliance with best market practice.
Our deliverables
Having held a series of meetings with senior client employees to ensure we fully understood the business, we reviewed the policy to identify areas of policy and procedures which could be improved and where the client fell short of best market practice. The scope included all areas of the fund manager’s risk practices including market risk, liquidity risk, tracking error and compliance with investment mandates.
Our findings were detailed in a report which was presented to management.